A mortgage is a temporary, conditional pledge of property to a creditor as security for performance of an obligation or repayment of a debt. Typically, a homeowner agrees to a mortgage in order to borrow money for purchasing or refinancing their home or dwelling. Many types of mortgages are currently available including mortgages of various lengths, mortgages with different types of interest rates (such as, fixed, variable, or a combination of the two), and mortgages that allow the borrower to pay off only interest on the loan for a period of time. These types of mortgages may also be known in the industry as regular mortgages or “forward mortgages.”
Another type of financial arrangement between a lender and a homeowner is called a “reverse mortgage.” A reverse mortgage is a loan that allows homeowners, usually older homeowners, to convert their existing equity in their home into available funds. The available funds may be provided, for example, through a line of credit, a cash advance, or periodic disbursements to the homeowner. The funds received by the homeowner are repaid with interest at a predetermined maturity date, or more commonly, when the home is no longer the principal place of residence for the homeowner. Typically, if the homeowner sells the home, moves, or dies, the loan is due to be repaid.
Frequently, the amount of the reverse mortgage is based on a percentage of the homeowner's equity in the home. In general, the more equity the homeowner has in the home, the larger the reverse mortgage loan amount is made available to the homeowner. If necessary, the reverse mortgage funds are repaid from the proceeds of selling the house. One factor in the amount available for a reverse mortgage is the home's value. Currently, under U.S. federal regulations, a reverse mortgage is a non-recourse loan, and thus, the repayment amount cannot exceed the home's value at the time of repayment. Yet another factor that affects reverse mortgages is the age of homeowner. In general, many lenders allow repayment of the reverse mortgage to be deferred until the homeowner dies or no longer lives in the home. Accordingly, if the borrower is older, a lender is typically willing to provide a higher percentage of the homeowner's equity as a reverse mortgage. Other factors may also be utilized in determining a reverse mortgage.
However, despite some of their benefits, forward mortgages are by far the dominant form of mortgages used today.